June Webinar: Selling to Oracle, Gaming Report, Retail Wars
Introduction and Market Overview

Ward Carter

Hello, and thanks for joining us and welcome to Corum’s June 2012 Tech M&A Quarterly.

I’m Ward Carter, chairman of the Corum Group, speaking to you from our headquarters in Seattle, Washington. You are part of a group of software and technology executives from over 20 countries who have registered for this event.

Here is our agenda for the next 60 minutes. We’ll start with our global market overview, followed by an interview with the CEO of Vitrue, who recently announced acquisition by Oracle. Then we’ll have a field report on recent deals from our team in Europe. Corum’s research department will highlight recent transactions and valuation data in the Corum Index. We’ll get an update from a recent international gaming conference in Singapore, where we presented. After that we’ll have a special report on the Retail Wars, and then an interview with the CEO of Zeacom, a company that recently sold to Endhouse. At the end of our session we’ll open the floor to Q&A.

Our list of speakers today includes Corum presenters from around the world, and we’ll introduce them in detail later. Our special guests today include Reggie Bradford, CEO of Vitrue, and Miles Valentine, CEO of Zeacom.

With that, I’ll turn the floor over to Corum’s CEO, Bruce Milne.

Bruce Milne

Thanks, Ward. With so many guest speakers and special reports, I’ll be brief.

In China, basically things are slowly down. We see that in house sales, car dealerships, loan targets, their labor costs are going up, we see this in cotton planning, which is interesting.

Specifically we have a headline that mentions a “sharp slowdown” but no concrete numbers. They just lowered interest rates, which means they are trying to incentivize the system and the economy. This is the first time they did that since 2008.

Moving west to Europe, things are worse. They are basically in a recession. The Italian economy has contracted the most in thirty years. UK retail sales have fallen the most in two years. European banks are noted to be unprepared for the Greek exit from the Euro. This is interesting, Carlos Slim, that’s smart money, right? The richest man in the world, he sees the Euro crisis as a good time to invest.

Cameron of the UK was urged to prepare a new growth push. Italy is now in the crosshairs of the debt crisis after Spain. And will $125B be enough for a Spanish bailout? Some people are saying it won’t.

Things are better here in the US. The New York region’s manufacturing exceeded forecasts, houses are for sale low as seller’s await higher prices. The US’ total industrial production exceeded the forecast.

But we have contrasts, we have business confidence, but we don’t have it in the workforce as job market progress stalls. This morning we saw the same thing, higher than expected unemployment claims. Consumer sentiment in the US has climbed to its highest point since 2007.

The S&P 500 tumbled to a four-month low in the face of economic reports.

In commodities and real estate, producer prices in the US have decreased for the first time in four months. That’s because we’re seeing the slowness in Asia as well as the recession in Europe. Homebuilder confidence, though, is up to a five-year high. New home construction was up in April. Oil fell to a six-month low in Europe. Europe has the most weekly declines in 13 years in oil. I just wish we could see it at the gas pumps.

And now we see that home refinancing has boosted the Florida and Nevada economies, which was where they had some of the worst news in the recession.

In technology, Facebook, well, we’re going to come back to that, they raised $16B. HP announced that they are considering cutting up to 25,000 jobs. Alibaba bought back a 20% stake for $7B.

Yahoo Wipro is to spend $1B in acquisitions. SAP is to acquire Ariba. Dell’s profit forecasts missed estimates on slumping PC sales. Hey, it’s going into smart phones and tablets.

Now, back to Facebook. Audience growth has slowed to 5%. Angry investors seek money from Facebook lawsuits! Samsung plans to launch a Facebook competitor next year. This isn’t hardware, is it? Who’d have thought. Regarding Facebook, Geekwire had Nat Burgess on he was one of the few that said he thought the IPO would have to be dropped because the revenue model wasn’t proven. This last headline, “A billion-dollar bet on Facebook’s future from Oracle and Salesforce.com.”

Field Report: Europe

Let’s now move on to a special field report. Nat Burgess and Miro Parizek are traveling in Europe. Let’s check in with them.

Nat Burgess

I’m here with Miro Parizek, our managing director for Europe, and one of our topics this month is international deals, just because we’ve seen a wave of them, and in fact there was a time this spring when I was working on a deal in New Zealand, one in South Korea, and one in Paris. Basically Paris started at midnight, New Zealand started at 11 a.m. and Korea started at about 4 p.m., which made for a 24-hour day. And Miro has been running equally hard.

We have a number of closings to announce that we are very excited about, just in the last couple of weeks, and then those closings are also indicative of some of the trends that we’ll be seeing in the market.

Later in this session I’m also going to bring a client, Miles Valentine, founder and CEO of Zeacom, online, to talk about his experience working on an international transaction with us. That was just closed two weeks ago. Before we do that, I wanted to chat with Miro about our current experience in international transactions. Miro, why don’t we start, can you just give us a summary of what we’ve been announcing, because the list is getting longer and it’s pretty exciting.

Miro Parizek

Sure, sure gladly. Just last week US-based Ansys announced the signing of a transaction to acquire our client Esterel, the Paris-based company that Nat was referring to. They are a systems software and simulation vendor. That acquisition was for 42 million Euro, 2.8X revenue.

We also announced the Zeacom deal, that’s the New Zealand-based company that Nat was referring to, they were acquired by the Canadian company Enghouse for $32 million.

Beyond those, we had multiple offers on both of those transactions and those were the ideal scenarios for our clients, obviously.

In April we also closed on the sale of Ollaworks, a Korean-based facial recognition vendor to Intel. That was their first ever transaction in Korea.

Speaking of April, we also closed a deal in Ukraine, our first deal that far off in Eastern Europe. That was a $17 million investment and acquisition of a minority stake from a local investor that had to compete against two other Western European bidders.

Jon Scott

That was especially interesting just because your client in that case was growing really fast, and in taking advantage of the emerging market in the Ukraine, which we’re very familiar with. A lot of people don’t know this, but we actually maintain a research center over there. We have highly-educated and highly-qualified researchers over there doing primary work for us in different markets that are interesting to us.

Now we have a tombstone in Ukraine.

On the Ollaworks deal, Nat, I remember when that first came out I was excited because it was our first multi-billion transaction. Unfortunately, it was 85 billion Korean Yuan, which translates to about $31M.

Let’s go back to Ciklum. When you started working on that deal, did you assume it would be a domestic PE firm who won the deal, or did you assume it would be someone else?

Miro Parizek

No, we actually assumed it would be either a Western European group or an Eastern European one, certainly not a Ukrainian group. The investors there aren’t particularly known for investing in IT services, normally they are investing in farming, in retail chains and banking, more consumer-driven types of investments, not necessarily technology. Although, the Ukraine is, as you mentioned, highly educated and a great place to put developers and that is exactly what Ciklum is doing. Interestingly enough, Torbin, the founder and CEO of that company, is a Dane actually, we met in Copenhagen.

Jon Scott

So we have a Ukrainian recapitalization with a Ukrainian PE firm, we have a South Korean firm selling to Intel in California, we have Zeacom in New Zealand selling to Enghouse in Toronto, and we have Esterel near Paris buying Ansys in Pittsburgh. There are two things that strike me there. One is that the world is flat, for companies that have built good technologies, that have advanced the state of the art in the market, the opportunity is global and that’s how we look at every deal.

The second thing is that with all the turmoil in Europe, we’re still seeing activity on European entities. Miro, what’s your take on that?

Miro Parizek

Well, that’s quite true, I mean, in reflecting on other transactions, other than the internal Ukrainian one, we’re working on two other deals and we have multiple bidders in both cases, and they include both European and North American interests. Also talking about who the buyers are, not just strategic buyers, PE and financial buyers are involved.

Jon Scott

We’ve seen a really strong software focus by PE firms here and things seem to be getting more active in Europe. I think they said they see opportunity, but Francisco Partners bought Email Vision in France, they bought Efront, also in France, they are very active, and a number of other firms are sending teams over, they are opening offices, the US guys are paying attention, partly because they see bargains, they are trying to be counter-cyclical. But then the Europeans are active as well, looking to diversify their risks.

In one of our recent announcements, and I can’t go into too much detail, even though the company was based in France, a lot of their revenue was coming from overseas, emerging markets in particular. So a European company, geographically diversified customers, very valuable in spite of the turmoil in Europe. We see some uncertainty over there, but Miro wouldn’t you agree that we also see a growing opportunity?

Miro Parizek

Absolutely. It’s interesting that you mention Russia, I know exactly what you’re referring to. Another client that we’re representing right now that has a number of suitors putting in bids is also doing high gross in Russia.

Jon Scott

Very interesting to be in those markets that are feeling the growth for a lot of the bigger companies and the bigger, more established companies, often the only way for them to get access now is through acquisition rather than building over time.

We’re actually at the end of our time, we’re going to shift over to our next segment here, which also focuses on the international. Miro, thanks for joining us.

Bruce Milne

Thanks, guys. When they announced the 85B deal they were talking, they forgot to mention it was yuan, and our phones were ringing off the hook.

Special Guest Interview: Vitrue

Our next guest speaker is Reggie Bradford of Vitrue, who just sold to Oracle, and who will be interviewed by our own Jon Scott. Jon?

Jon Scott

Yeah, thanks, Bruce. I’m really pleased to introduce our first seller’s panel guest today, Reggie Bradford, who is the founder and CEO of Vitrue. It was announced on May 23 that Oracle was acquiring Vitrue for a reported $325M, or 16X their trailing twelve months revenue. Vitrue is a social relationship management platform that helps friends amplify their social message with tools and applications across social marketing platforms, including Facebook and Twitter. So Reggie, thanks for being here this morning. When you and I caught up earlier this week, I was amazed to find out that this is your third major exit as a company founder. Give us a brief background on the other two.

Reggie Bradford

Absolutely, Jon, I’m glad to be here. This is my third startup that was in a major exit. The first two were WebMD, back in 1999, and that merged with Healtheon in a $5B transaction. After that, I was part of the team that built a software company called N2 Broadband that was a venture-backed company that developed software for the cable industry to enable video on demand. They were purchased by Tanburg Television in 2005 for $120M.

Jon Scott

That’s great, and those names are certainly familiar to many people. Tell us about Vitrue.

Reggie Bradford

So, I founded Vitrue just about six years ago as a company whose aim was to build software that would allow marketers to build relationships with consumers. I felt like there was a big tectonic shift happening in the world, really, where consumers became more in control of the relationship over the brand and were going to be in charge of that relationship. I saw that marketers that adopted would be successful and those that did not would not and I felt like social media and networking was the key to enable marketers to unlock that value and build those relationships with consumers.

Jon Scott

That’s one thing that I pick up is that Vitrue was ahead of its time, as well as WebMD. That’s a trend I see is that you are looking at kind of disruptive changes. You and I talked about pivots in an earlier conversation, where an early-stage company changes the premise of a company literally in flight. Did you have any pivots with Vitrue?

Reggie Bradford

Oh, yeah. I would say that the vision that I laid out, that’s been consistent since I founded the company, but we had a major pivot in terms of go-to-market strategy. The first iteration of the company, we built software on dotcoms to allow consumers to upload video and photo. Back in 2008, about two years in, we saw the writing on the wall that consumer behavior was shifting dramatically before our eyes. This was back when Facebook had 20 million consumers, and more and more consumers were spending time inside the social networks themselves, as opposed to on the broader internet, so we moved the company to build software that worked within the social networks, specifically Facebook, was that massive pivot. Now, of course, there are 900 million users on Facebook, it has become the operating system of the internet and the rest is history.

Jon Scott

That’s interesting. So with the consolidation in the social media industry, was Oracle more attracted to your leadership position in the market, or do you think they saw you as part of a strategic growth path?

Reggie Bradford

Well, I think a couple of things. Number one is Oracle is a software company. They invented enterprise software, in my opinion, so they looked at the various companies on the market and they went after the companies that they felt had the most solid state enterprise trade cloud-based platform for social marketing. That was, I would say, their number one ambition. In addition to that, with announcements they made in the last couple of weeks, Oracle is making an increasingly larger push to the cloud. I think that Vitrue’s social relationship management platform is part of a broader push by Oracle and I think definitely the company’s leadership and innovation in the industry was certainly something that I’m assuming was attractive as well.

Jon Scott

Thanks, Reggie, that makes sense. A couple more quick questions as we wrap up. A CEO and especially a founder, has a lot of emotional ties to his company and his employees. How did you decided this was the right time to make a move and how did you select Oracle as the right partner.

Reggie Bradford

Well, I guess I sometimes refer to Vitrue as my seventh child, as I have six children. It was definitely an emotional decision, probably more so than the other two companies I sold. But every child and every company faces a certain stage of maturity and taking it to the next level is like sending a kid off to college. I felt like truly in the stage that Vitrue was at, and where the industry was, and how fast the space was moving, and marketers around the globe were making decisions on platforms to manage social presence that we really needed to identify and work with a partner that could scale us globally in 145 countries and Oracle has almost 400,000 customers, so it was an easy and logical step for Vitrue to stand on the shoulder of giants in this example.

Jon Scott

One last question. You mentioned your six children and as you know I’ve been a CEO who has sold a couple of companies myself. Did your kids see you at all during this process and how did you handle the balance?

Reggie Bradford

It’s been crazy. We kidded, but we have literally been in a full sprint for at least the last 24 months. I also have a tremendous staff around me and one of the things I think I’ve done well is I realized I’m not the smartest guy in the room and I’ve surrounded myself with people that have great experience and great track records. Team is a big part of our ethos and a big part of our culture. We’ve just built an amazing organization up and down the company. I trust those groups to help build the company when I’m not there. I definitely make it a priority to stay in close touch with the family throughout the process. I’m most proud of the balance I’ve been able to achieve in building Vitrue.

Jon Scott

Thanks, Reggie, it was really enjoyable having you on. I hope you can stay for the Q&A later in the session.

Back to you, Bruce.

Bruce Milne

Yes, thanks, Reggie, and there are a couple of questions that have come through for you if you can stick around.

Corum Index and Research Report

Let’s go to our research department for the Corum Index, our report on deals, valuations and M&A metrics. Joining us today are Alina Soltys and Jason Steblay. Alina?

Alina Soltys

Thanks Bruce. This month I will be joined by Jason Steblay, a new member in the research group as we quickly go through the Corum Research portion of the webinar. Stay tuned for next month’s half yearly report covering all the sectors in-depth.

Jumping straight into the Corum Index which we track on a monthly basis, I’ll call out a billion dollar deal here. SAP’s acquisition of Ariba, a B2B supplier relationship management provider, for a total price tag of $4.5B, valuing it at 8.6x revenue. This is the largest software transaction in the last nine months. SAP will have the opportunity to redirect its customers to the Ariba network, anticipating trillions of dollars to get processed through this network. As compared to last year’s record deal, the $8.5B you see there was spent on Skype.

Jason, what are we seeing on the PE Side?

Jason Steblay

Several factors weighed on PE activity in May, which fell from a year ago in the Corum Index.
The drop in PE Value could be due to firms focusing on smaller deals following lots of billion dollar deals recently, now that the big deals are done, they can bring the smaller deals back onto the front burner.

Private equity firms are also facing increased competition from strategic buyers, who are flush with cash. Last week, Moody’s reported that nonfinancial firms held $1.24T in cash at the end of 2011.

This could also be responsible for the increase in all cash deals in May, as those strategic buyers look to buy up additional assets rather than return cash to their shareholders.

With that let's move into our sector reports.

Alina Soltys

Moving into our first sector, Horizontal had a little bump up this month as compared to the lows hit in April, but it is still trading as the healthiest sector we highlight out of six. This is because there are a lot of SaaS players included in this sector that help drive such healthy metrics.

To provide some context around our next deal in social media marketing, let’s look at some of the market dynamics.

Marketing effectively to customers via social media channels, and tracking and analyzing those results has really hit a high note both in terms of deal activity and value. Just as Facebook is having a hard time justifying its value and monetizing their ad opportunities, an entire ecosystem has been built on servicing social media outlets and priming marketing material to be pumped through those channels.

A special thanks to our guest Reggie who gave us a good overview of Oracle’s thought leadership in that space with the acquisition of his company, Vitrue.

On to our example deal, IBM is not stepping back from Project Northstar that began a few years ago, now labeled “Smarter Commerce,” they just acquired TeaLeaf for analytics on customer engagement and e-commerce strategies, as well as their deep-rooted capabilities on the mobile front, both in terms of tracking mobile conversion and usage rates, among others.

This deal by IBM, Oracle’s acquisition of Vitrue, as well as Adobe who are acquiring EfficientFrontier, have been estimated to run up a grand total of $1B just this month!

The last point I want to make here is that before the large giants cast their gaze upon these successful but lucky few, all three, TeaLeaf, Vitrue and EfficientFrontier picked up companies on their own in the months right before their own buyout. So firms in this space, no matter their size, should be thinking about possible synergies with other folks to create those exceptional gains.

Jason, you have been tracking an Asian Firm that is hoping acquisitions will cause exponential gains of their own, right?

Jason Steblay

That’s right, GREE’s acquisition of Funzio helped the Consumer application market tick up in May. GREE is continuing to execute on its growth strategy in the United States by acquiring the San Francisco-based game developer for $210 million dollars in May.

Jim will provide a more macro level overview of the gaming ecosystem, particularly as it relates to South East Asia later in this webcast. But with the acquisition, GREE gets 3 popular titles and their existing users to populate its new American gaming platform, which it got from OpenFeint last year.

GREE’s US expansion strategy is to combine a development shop with a gaming platform to quickly broadcast new games and compete against DeNA, GREE’s Japanese archrival, which already has its own American gaming network and development shop.

Meanwhile, Zynga has been looking to make up for flagging user rates on Facebook by acquiring new games like DrawSomething and Words With Friends, and launching its own social-game platform in March.

In the hit-or-miss world of games, GREE, DeNA, and Zynga are betting that becoming a platform will help them keep existing players and attract new users more cheaply than other marketing techniques, and in turn offer a more stable flow of revenue. But it remains to be seen if consumers will extend their loyalty to any particular gaming platform like they have to Facebook.

Alina, you have another high valued deal in the infrastructure space, right?

Alina Soltys

A quick note before moving to the deal, this sector continued its decline this month as well, which is not a surprise given current market conditions.

The acquisition of XtremIO by EMC illustrates two unique concepts for us. EMC shelled out $430M for a pre-revenue company that had raised $24M in funding since its founding in 2009.

EMC is a very savvy buyer and integrator, but taking a bet on a pre-revenue company for this public giant is no small move. Israel is familiar territory, after acquiring 5 previous companies of high-tech caliber there.

XtremIO has developed an all-flash storage array that can be used across the stack to improve performance especially in the ‘Big Data’ world we live in. Things like analytics and processing capabilities will be much quicker using flash. EMC even had a code-named “Project X” already hard at work on a solution that they publicly promised customers in a press release. One way to get there quickly is the purchase the solution that fills that promised gap.

Jason, you’re profiling the other billion dollar deal from this month and one that has a lot of scale.

Jason Steblay

You’re right, even as the IT services market took a step back in May, it still produced one of the month’s two mega-deals as the Canadian IT services firm CGI Group acquired UK-based Logica for $2.6 billion dollars, creating the sixth-largest worldwide IT services provider. Prior to the tie-up, the two companies were highly synergistic in several vertical domains, including government, financial services, and telecom, but had almost no geographic overlap. In 2011, about 94% of CGI’s sales came from North America, compared with just 3% for Logica. CGI will look to use Logica to expand into Europe and other parts of world where it is not already present.

With current events, such as Europe’s burgeoning debt crisis, weighing against the market-value of some of the continent’s premier tech companies, their North American competitors may be tempted to go bargain hunting across the pond -- like Nat and Miro mentioned earlier in the webcast.

In addition to CGI, just two days ago Carlos Slim expanded his stake in Dutch Telecom KPN for the second time in a week. For the time being, North American firms are looking for value in Europe while keeping the risks of the Euro Zone in mind.

Alina Soltys

Thanks Jason, and that wraps up our research portion of the webinar, back to you Bruce.

Bruce Milne

Thank you Alina and Jason, good report this month. Lots of interesting things happening. It’s interesting, some of our very first mergers were with Logica and EMC over two decades ago. How things have changed. It’s very good to see that VCs are increasing their sales activity, those numbers are up 20% over last year.

A note on that cash, there is so much cash right now, it is coming into play all over. A lot of the cash flow is offshore. Interesting commentary on the Japanese, and we’ll hear more about them in our next presentation. They’re very active, the IMF just said yesterday that their currency is way overvalued. Hey, good for them, they were able to buy a lot of people.

Spotlight Report on Asia Gaming Conference

Now let’s move. We were in Europe, now let’s move to Asia with Jim Perkins, fresh from the gaming conference in Singapore. Jim?

Jim Perkins

The pace of video game M&A throughout Asia is at an all-time high. Nexon, GREE, WeMade and NeoWiz are positioning themselves through acquisitions to play in the world’s $80B games industry.

I was honored to be a featured speaker and panel host in Singapore at Casual Connect Asia about three weeks ago. Vide game CEOs attended from more than 40 countries. It was an outstanding conference. Singapore is the business hub of Southeast Asia. The 11 countries that make up the region have a population exceeding 600M. Indonesia is the largest country in the region, and has the most potential for growth. The dominant platform is the internet, specifically Facebook. Almost everyone online there is on Facebook. The fastest growing game segment is on mobile devices.

Asia, overall, is the largest growth contributor to the casual and mobile game sector worldwide. Online and mobile games will make up over 50% of all game revenue by 2014. Video gaming on smart phones has increased 20X in just two years. The global virtual goods market is expected to exceed $20B by 2015. Tablet sales are growing faster than phone sales. In terms of total game revenues, Asia is growing faster than any other region in the world.

GREE, the Japanese mobile social network company, has made a big statement in worldwide gaming, by buying OpenFeint and Funzio. They bought the mobile social platform, OpenFeint for $104M, and just recently they bought mobile game maker Funzio for $210M, as mentioned earlier – it’s interesting to see this Japanese company on the move with the acquisition of these American companies. Also, GREE had a significant presence at last week’s E3 in Los Angeles.

Last week Korean online game developer and publisher Nexon invested in South Korean publisher NCsoft, and is now the largest shareholder in that company. This partnership combines NCsoft's IP and Nexon's international publishing platform to make them a worldwide play in the online gaming space. Nexon has made a series of studio acquisitions and investments in social gaming studios in the last 6 months.

Corum believes this wave of consolidation in the Asian gaming market, and the expansion of Asian gaming companies worldwide, will accelerate. These companies have cash, and clearly understand the online and mobile game landscape better than most.

Understanding Asia’s plans for further expansion, and how they buy, will help prepare North American and European game companies to achieve optimal outcome in an acquisition, when they come knocking.

To find out more, please tune into the World Financial Symposiums Spotlight webcast on June 26, and attend Casual Connect Seattle in late July where I’ll be presenting a detailed video game market update, and hosting our M&A technology buyers and sellers panels.

Back to you, Bruce.

Bruce Milne

I liked the pictures you sent back from that one. People don’t realize how big Indonesia is, it’s the fourth most populous nation in the world behind China, India, and the US, a big factor going forward I’m sure. We’re looking forward to your special market spotlight webcast with the WFS. We’re proud to be a sponsor.

Retail Wars Report

For our next special report, here are Elon Gasper and Jon Scott. Guys?

Jon Scott

Thanks, Bruce. Today Elon and I are looking a move ahead into the retail wars. They’re certainly heating up--major tech companies are moving into retail, and retailers are moving into tech. Let’s guess what happens next.

Elon Gasper

That seems called for, Jon, since Corum predicted this spring’s surprise deal in this segment, right here on Tech M&A Monthly and in Nat Burgess’ national television appearance on CNBC several months before it.

Jon Scott

That was Microsoft’s move to buy into the new Barnes & Noble spinout that will include the latter’s Nook E-reader and college bookstore unit.

Elon Gasper

That’s a six hundred store footprint from which to push their bricks plus clicks retail model to challenge Apple’s tremendous success at it. So enter tech, buying physical. While at the other end of the arena, traditional retail outlets are buying online businesses to build their e-commerce capabilities. A worthy representative of that path is last year’s Wal-mart acquisition of Kosmix to form its WalMartLabs venture.

Jon Scott

It seems everyone wants their own combination strategy. So, what will the next big move be?

Elon Gasper

I’m willing to speculate. First, let’s review the cast of this drama, or at least some of the main characters.

Jon Scott

I see you’ve added Amazon, and that makes sense, it’s clearly no minor player in on-line side at least. OK, let’s see how they all stack up both ways:

Elon Gasper

I think you’ll see they’re all filled out except one. Clearly Amazon has been left crying in its clicks after being jilted by Target last August. Amazon is really the only one of these major retail tech companies that would seem to need a partner.

Jon Scott

I see where you are going with this, Elon, but I don’t think Amazon is going to buy an old school retailer. Maybe have another temporary hook up with one, on the bounce from Target, like, say, Bed, Bath and Beyond. But Amazon knows its skill set is not in committing to the margin-killing HR overhead of managing of human clerks and salespeople. It’s built an internet and delivery machine, not a physical customer contact one.

Elon Gasper

Actually, I agree, Jon. Plus despite other breakthroughs from Amazon, like Kindle and the AWS cloud, Bezos’ story, his legend, is about taking a leap to a new generation of retail, the online one. I don’t think he’ll want to settle for anything that looks like a retreat from that, that’s not a dramatic, new generation of retail somehow.

Jon Scott

He may have to – or more slowly build, not buy. Didn’t Amazon’s Quidsi acquisition came with some physical retail presence that there was talk of expanding? Plus Amazon’s rumored to be opening a pilot Kindle and books boutique here in Seattle, and installing delivery lockers at some 7-Elevens. Those aren’t major moves to an offline presence.

Elon Gasper

Perhaps buying a special type of retailer would make sense. Let’s look back a few months at another major Amazon acquisition. I’m talking about when Amazon surprised us all by picking up Kiva, the warehouse robot company, for over three quarter billion dollars.

Jon Scott

What an aggressive move -- buying the whole company, instead of just buying their robots!

Elon Gasper

Why’d they do it? Would Amazon take on that level of complexity, running a robot business, just as leverage against their competition using them?

Just a little speculation -- What if Amazon had longer range plans, to use robots outside warehouses, in point of sales retail?

Jon Scott

OK, so what retailer would Amazon buy to jumpstart this gamechanger?

Elon Gasper

There’s one here in Seattle, Amazon’s backyard, that has already replaced human contact at retail with automation at scale: Coinstar.

Jon Scott

Now, that would be interesting. And just like our Barnes and Noble prediction, it’s one that no one is expecting. Plus Coinstar owns Redbox, too.

Elon Gasper

Together, Coinstar and Redbox already have thousands of automated kiosk-style vending machines in high traffic areas, where consumers can order DVDs or video games from remotely and pick up when they grab dinner—all without human contact.

Jon Scott

It’d be a retail jumpstart on a secure channel for Kindle and other high margin items, like its accessories and Amazon published books – simple items that could be dispensed like DVDs.

Elon Gasper

Amazon could then expand these venues into full-scale automated retail, with miniature Kiva robots sorting, stocking and fetching your orders from an attached back room mini-warehouse – maybe even refilled from docking trucks that are delivering Amazon goodies around your neighborhood already.

Jon Scott

Kiosk malls for that matter, with front ends facing next to each other—just like today’s shopping malls—could be built. Almost a return to the traditional store, where you walked up to a counter, asked for what you wanted, and the clerk fetched it. Quite a vision.

Elon Gasper

Sounds unbelievable, but so did our Barnes and Noble idea.

Jon Scott

Bruce, it may never happen, but there’s a case why it should – and you heard it here first. Back to you.

Bruce Milne

Yeah, weren’t you the guys behind the call that Barnes and Noble should be getting in with Microsoft, and people thought that was crazy.

We’re live to 35 countries, and I see that we have some people from Amazon on, if you guys want to respond to that, jump online here and send it to us and we’ll bring you on.

Thank you, gentlemen. With players like Safeway and McDonalds up there, there’s clearly plenty of food for thought. Sorry, I had to get that in.

Special Guest Interview: Zeacom

Now, wrapping us up with our special guest Q&A, you heard from Nat earlier, let’s hear from our old friend Miles Valentine, who just sold Zeacom down under.

Nat Burgess

We have Miles Valentine here from Zeacom, which was recently acquired by Enghouse in Canada. Welcome, Miles.

Miles Valentine

Thanks, Nat.

Nat Burgess

I’m glad you could join us today because you’ve just gone through the ringer on a really exciting transaction. When I say through the ringer, I know there was a lot of work involved. I want to start by asking you what got you into thinking about investment and M&A? What were you trying to accomplish with the company?

Miles Valentine

Well, we had a specific opportunity that was opening up in our industry or marketplace, where Microsoft was and are entering the communications space and they are providing a communications application that is going to be totally different and frankly going to cause a lot of disruption. It’s one of those areas where you can just keep investing, so it provided us with a specific opportunity to go and chase and to do that we needed a bit more capital. That led us to wonder if it was time to go back out to the market and seek capital? We figured on the disruption, which is definitely occurring, and also our recent performance. We’d been growing well and showing profits, which we thought was a good combination to take to the market and seek capital.

Nat Burgess

Going through that process and obviously working with you, we saw the dynamic of the private equity guys, but as we got further down the path and some of the strategics started stepping up and getting interested in the deal, was that a surprise to you, did you see this purely on the financial side?

Miles Valentine

No, it was definitely surprising. We were specifically looking at it only as a financial play and frankly didn’t think strategics would come into it. We hoped that they would but we figured that would be on the back of successful execution around the Microsoft story. So, yes, Enghouse and another couple of parties coming in definitely surprised us.

Nat Burgess

It seems like the telephony market has gone through so much change, so many of the entrenched players have gone away or gone bankrupt, and you guys have managed to grow through all that and innovate ahead of the competition. It seems like we reached a point where the MS opportunity for you was maybe the breaking point, where you needed to get bigger, more powerful, have a stronger balance sheet, or get bought, and you had a good opportunity to do both of those things. What ultimately convinced you to take the strategic sale.

Miles Valentine

I don’t think there was any one thing, I think there were a number of factors. Truthfully, there was a surprisingly good fit between ourselves and Enghouse, which we really hadn’t identified at the start. We have channels, we have a smaller end product, they have a bigger end product and they sell direct. We’re strong in Asia where they’re relatively weak and they’re strong in the UK where we’re relatively weak. We just have a very strong complimentary pairing. It was a good, easy fit. That was definitely one of the factors.

We’ve also been around for a fair time, we’re venture-backed, and some of those VCs got in two years ago and as far as they were concerned, they were ready to exit as well and they were hoping that a strategic buyer might come out of the capital raising process. And sure enough it did, obviously.

There were a number of things, certainly not just one thing, but as I said, the Enghouse fit became clearer and clearer as we got to know them more and more. It was interesting talking to them afterward, they actually went out looking for a company like us, they realized that they didn’t have those elements of a smaller product, the channel expertise, and those were specifically things that they were looking for. The fit from their side was pretty well-identified as well.

Nat Burgess

Excellent. From what I understand, a very intense and vigorous process run by Enghouse.

Miles Valentine

I don’t think I’ve ever worked as hard as I did in the four weeks leading up to the transaction. We had a pretty quick turnaround, we negotiated the LOI over Easter weekend and the deal closed on May 31st, so that last few weeks was very intense. Due diligence was going on right up until the last few days and negotiating the final elements of the sale and purchase agreement was all on, that’s for sure. I had a pretty ragged subset of the management team by the time we were done, that’s for sure.

Nat Burgess

Well, congratulations again on closing the deal and thanks again for joining us.

Bruce Milne

Thanks, guys. Miles, as you may have read was Entrepreneur of the Year in New Zealand and he’s a serial entrepreneur, I’m sure we’ll see him back in the M&A headlines.

It think it was very important what he said at the end there, in his words, being all on during due diligence. I can tell you that since we did that transaction with Miles, he took extra effort in the preparation and positioning to get through the due diligence, because it is tougher these days.

I really would also encourage you to check out a Selling Up Selling Out conference or one of our Merge Briefings. The better educated you are, the greater your success in today’s M&A market.

Q&A

Now let’s get to Q&A, I know we have a number of questions. Ward?

Ward Carter

Yes, we have several that came in. One is from a listener that runs a social media ad network and was looking for any advice you could give social media companies on what the best time to sell is. I think in conjunction with that, they’re also curious about any ideas you may have about deals that are on the horizon, that we should look for in the social space.

Reggie Bradford

That’s a mouthful there, but I would say that if you look at the space that we’re in, it’s a combination of paid, owned and earned are what marketers looking at, and obviously the caller is in the paid space. That’s a very important component or ingredient looking at marketing on Facebook, Twitter, and Google, obvious there’s building the presence and the experience and then amplifying that through advertising. We have lots of companies that we work with on the ad side that are partners and going forward I think that it’s definitely an interesting space to keep an eye on.

I think in addition commerce on Facebook is another area that I’m keeping a key eye on and I think that as far as best time to sell, I can’t really give others advice. I think that we were not looking to sell, we were approached to be acquired, so that’s where you want to be.

Ward Carter

Great, thanks, Reggie. Bruce, maybe you should take this one, it’s regarding valuation. There was an observation that valuations had taken a slight hit recently in some of these sectors especially when we look at the public multiples. Is that an indication that tech M&A is in anyway slowing?

Bruce Milne

No, in fact it’s kind of uncoupled. We saw last year when we had the sharpest drop in the Dow every, everyone was in a panic and Armageddon was imminent, and actually right after that we had our strongest fourth quarter since the dot-com era. The valuations of public companies, those are being traded daily, but of strategic transactions, those are staying fairly strong and the same thing here, we saw the worst month for this year, we retraced from where we were, all the gains we had this year, yet we just had our strongest second quarter, as you saw from the reports today, since the dot-com era.

There is a lot of cash, there is a lot of strategic imperative, there are a lot of disruptive changes going on, and we’ve heard about some of those from our presenters today. We’re not seeing any slowdown in activity.

Ward Carter

Okay, thanks Bruce. The next question here I’d like to direct to Jon Scott. Jon, several parties found the speculation about CoinStar and Amazon of interest, and I guess the question is, how often does a deal come out of left field, where the buyer was not obvious, and maybe not even on the radar.

Jon Scott

That’s a great question, Ward, I would have to tell you that about 50% of our transactions that conclude are with buyers that were not aware of our client when we first approach them. What we’ve done is put together a position on why we think there’s a fit and we go out and reach out to them. About half the time they don’t know.

Ward Carter

I guess that just shows the merits of doing a very broad, global search.

Jon Scott

Absolutely. About 40% of the interest comes from parties that you would think would probably have less interest and that’s why, again, the broad global search is so critical. The worst thing I can tell you to do if you’re an entrepreneur out there is to talk with only one company. You need to look and see what the market looks like out there.

Ward Carter

Thanks for that insight, Jon.

We’re right on the hour, so that wraps it up. I’d like to thank all of the speakers, especially our guests and thank you to all the attendees for joining us. Hopefully you can join us for an upcoming conference. We’ll see you next month.